Knowing More about Tax Ratio and Its Challenges
Jakarta, Ideatax -- Although tax ratio is not the only way to assess tax performance in a country's economy, the tax ratio has long been used by countries around the world as a means of assessing the performance of the tax authority. However, the tax ratio is considered as a general measure that provides an overview of a country's taxation condition (Binus, 2019).
In general, the tax ratio or also referred to as the tax to GDP ratio is the ratio between a country's tax revenue compared to a country's economy as measured by Gross Domestic Gross (GDP). Thus, mathematically, the tax ratio is calculated using the following formulation: (Investorpedia, 2021).
Based on the definition above, the tax ratio can basically be seen from two different sides. First, the tax ratio can be seen as a way to assess a country's ability to collect tax revenue. It means that the higher the tax ratio, the better a country's ability to collect taxes. Second, the tax ratio can also be seen as a means to measure the tax burden carried by a country's population (DPR, 2014).
However, there are substantial problems in calculating the tax ratio. There is a difference in the definition of tax revenue used in calculating the tax ratio between the International Monetary Fund (IMF) and the OECD (Ministry of Finance, 2023). The International Monetary Fund (IMF) in the Government Finance Statistic Manual (GFSM) does not include social security payments as a component in calculating the tax ratio. Thus, GFSM only uses taxes as follows in calculating the tax ratio:
- Taxes on payroll, profits and capital gains
- Taxes on payroll and workforce
- Taxes on property
- Taxes on goods and services
- Taxes on international trade and transaction
- Other taxes
In contrast, the OECD includes social security payments as a component in calculating the tax ratio. Therefore, the components used by OECD countries in calculating the tax ratio are as follows:
- Taxes on incomes, profits and capital gains
- Social security contributions
- Taxes on property
- Taxes on goods and services
- Other taxes
Based on the explanation above, it is clear how the IMF and OECD define tax revenue in formulating the tax ratio calculation. The IMF in the GFSM does not include social contributions in the calculation of the tax ratio, but includes it as a stand-alone component of state revenue. On the other hand, the OECD actually includes the social security component in the calculation of the tax ratio. This is because most OECD countries implement a welfare state system (Ministry of Finance, 2023).
After knowing the difference between OECD and IMF tax ratio calculation, the next question is where does Indonesia stand? Does Indonesia follow the OECD or IMF formulation?
To answer this question, we must first look back at the Law on Treasury and State Finance. Law No. 1 of 2004 on State Treasury regulates that government financial statements are prepared in order to produce government finance statistics (GFS) so as to meet the needs of analysing fiscal policies and conditions, managing and analysing cross-country comparisons, government activities and presenting government finance statistics.
Furthermore, based on Government Regulation number 24 of 2005 concerning Government Accounting Standards as amended by Government Regulation number 71 of 2010 regulates that the Government in preparing General Guidelines for Government Accounting Systems which will be a reference for the preparation of Central and Local Government Accounting Systems, which are needed in order to realise fiscal consolidation and government financial statistics nationally. Thus, the accounts in the Indonesian state budget are prepared adopting the GFS format.
Based on the above, we can know that in the government accounting system, the government refers to the GFS published by the IMF. Thus, in calculating the tax ratio, the government does not include social security as a component of income. This is different from European countries and OECD countries that include social security components such as old-age security contributions, insurance and other similar levies.
Therefore, if you want to compare the performance of tax revenue in Indonesia, it would be more appropriate to compare it with countries that use the Governmental Finance Statistic Manual (GFSM). Comparing Indonesia's tax ratio with OECD countries directly without adjustment will cause the information received to be biased. Alternatively, we can use government revenue – per cent to GDP data published by the IMF as follows:
Source: IMF (2023)
Based on the government revenue to GDP ratio data above, we can see that generally the proportion of tax revenue to GDP in Indonesia is lower than other countries in Southeast Asia. In fact, from 2011 to 2020, Indonesia's tax-to-GDP ratio continued to decline (IMF, 2023).
According to Fuad Rahmany, there are several factors that cause the low tax to GDP ratio, one of which is the low tax coverage, which is the ratio between the tax authorities and the population and area (Ministry of Finance, 2023). The next factor that contributes to the low tax revenue compared to GDP is the difference in tax rates and bases. For example: in Indonesia, the VAT rate is 11% while in Malaysia, the VAT rate is 20%.
Moving on from this, to improve the ratio of tax revenue to GDP, there are basically several things that the government can do. First, the government needs to adjust the calculation of the tax ratio with countries that use the GSFM published by the IMF or based on guidelines published by the OECD. This is important to measure the extent of tax performance in Indonesia. Second, the government needs to expand tax coverage by adding service offices and the number of tax authorities. Third, the government needs to facilitate the investment climate, so that even with a lower tax structure and rate, it can attract investors to do business in Indonesia. In the long run, an increase in the amount of investment along with an improvement in the tax system will increase the tax ratio itself. This is in line with research conducted by Gaspareniene et al (2022) which states that foreign direct investment (FDI) has a significant impact on tax revenue.
Binus. (2019, October 25). Tax Ratio Series – Perhitungan Tax Ratio dari Masa ke Masa. Retrieved from Binus University: https://accounting.binus.ac.id/2019/10/25/tax-ratio-series-perhitungan-tax-ratio-dari-masa-ke-masa/
DPR. (2014). Meningkatkan Tax Ratio Indonesia. Jakarta: Setjen DPR.
Gaspareniene, L., Kliestik, T., Sivickiene, R., Remekiene, R., & Endrijaitis, M. (2022). Impact of Foreign Direct Investment on Tax Revenue: The Case of the European Union . Journal of Competitiveness, 43-60.
IMF. (2023, October 07). Government revenue, percent of GDP . Retrieved from IMF: https://www.imf.org/external/datamapper/rev@FPP/USA/FRA/JPN/GBR/SWE/ESP/ITA/ZAF/IND
Investorpedia. (2021, Juli 21). What Is the Tax-to-GDP Ratio? Definition, and What Is a Good One? Retrieved from Investopedia: https://www.investopedia.com/terms/t/tax-to-gdp-ratio.asp
Kemenkeu. (2023, Oktober 07). Perbandingan Komponen dan Struktur Pajak OECD dan Government Finance Statistic Manual dan Pengaruhnya atas PendefinisianTax Ratio di Indonesia. Retrieved from Kemenkeu: https://anggaran.kemenkeu.go.id/in/post/perbandingan-komponen-dan-struktur-pajak-oecd-dan-government-finance-statistic-manual-dan-pengaruhnya-atas-pendefinisiantax-ratio-di-indonesia
Hello, is there anything we can help?